CANADA: Analysts Eye Risks To BOC Cuts Post-CPI Data (1/2)

Canadian bank analysts don't appear to have altered their base cases for the June BOC decision in the wake of stronger-than-expected April core CPI readings. However, most who saw multiple cuts in the coming months have reconsidered that in light of the CPI data, with a rate cut on June 4th potentially hinging on next week's national accounts data and/or developments in inflation expectations. 

Selected comments:

• CIBC's base case for a 25bp cut in June is in question following the CPI data: "While headline inflation was in line with our forecast, core measures looked stronger than anticipated which puts a question mark over our forecast for a 25bp cut at the June meeting. That call now relies on next week's GDP data suggesting that the economy is tracking towards a contraction in Q2, which would be weaker than the Bank of Canada's less pessimistic "scenario 1" forecast within its April MPR. Without that evidence, policymakers could well elect to wait for more data before making further any further reductions in interest rates."
• RBC similarly sees risks that its base case of a couple of summer cuts will not materialize: "the BoC will be more concerned about growth in their preferred core price measures, which should not be impacted by tax changes. Those were already showing signs of acceleration in months before tariffs were imposed... Our own base case expectation has been that a softening economic growth backdrop will ultimately push the BoC to cut the overnight rate down to 2.25% in the summer (from 2.75% currently) after skipping a reduction in April. But the central bank will need to balance that pessimistic growth outlook with inflation pressures -- and the latest upside inflation surprise means it could well now take downside economic growth surprises to justify further cuts."
• TD still sees a June cut as live, albeit with significant risks: "We think the Bank of Canada can still look through a hotter inflation backdrop with more evidence of slower growth due to tariffs...The Bank can draw some comfort that CPIX and the ex. food/energy measures remain well below CPI-trim/ median, with both CPIX/xFE sitting at 2.6% y/y in April, but it's less comforting that all four measures have seen a similar acceleration since bottoming out in Q4. We believe the Bank can still look through this increase with more evidence of softer growth in Q1 National Accounts, but if next week's GDP report does not show a meaningful impact from recent tariffs and uncertainty then a June rate cut looks far more challenging."